Investment and
speculation are ultimately the world’s greatest probabilities
games. Traders exist in a realm of constant uncertainty, where
capital must be deployed today well before the unknown future
arrives. To increase the odds of success for any trade, traders
should only deploy when probabilities swing way into their favor.

So it is not
surprising that virtually all financial-market analysis is designed
to help deepen our understanding of the underlying probabilities
governing the markets at any time. The whole gamut of research
approaches from fundamental to technical to sentimental ultimately
boils down to gaming whether or not today is a
high-probability-for-success opportunity to buy or sell.

Outside of the
futures world, one particular technical tool used to help hone our
understanding of probabilities in play is widely ignored. It is
known as seasonality. Seasonality is the tendency for a
price to be stronger or weaker at different times during the
calendar year. This concept naturally emerged in the commodities
world, where seasonal effects can make big differences in tactical
price trends.

The classic
seasonal examples are the agricultural commodities such as wheat.
Summer, of course, is the prime growing season for wheat. So most
new wheat that hits the markets floods in around harvest at the end
of summer. With wheat supplies usually hitting their peak just
after harvest, prices tend to retreat leading into harvest in
anticipation of the temporary supply glut. Wheat traders know this
and trade accordingly.

But seasonality is
not limited to agricultural commodities rigidly governed by
celestial mechanics. It exists, usually in more subtle forms, all
over the place. For a little-considered example, think of general
stock trading. It usually tends to taper off in the summer as
traders go on vacation, so the summer stock markets are generally
considerably weaker and softer than the winter markets when everyone
is paying attention.

Seasonality also
exists in gold. There are times of the calendar year when gold
tends to do well and other times when it does not. Although there
are many varying reasons for this phenomenon around the world, the
most famous example of gold seasonality has to be the Indian wedding
season.

Indians have a
deep cultural affinity for gold, so in the autumn India’s farmers
tend to invest their profits from harvest in gold. But even more
gold is bought for the Indian weddings that happen late in the year
during festivals, mainly in October and November. Something like
40% of India’s annual gold demand occurs in this short period of
time. Wedding gold is often in the form of intricate 22-karat
jewelry that the bride’s parents give her to secure her financial
future and financial independence within her husband’s family.

Just as wheat
traders use wheat’s seasonality to help them make trading decisions,
gold and even gold-stock traders can use gold’s seasonality. With
gold having definite seasonal tendencies at different times during
the calendar year, investors and speculators can study it to better
understand when seasonality helps or hinders their probabilities for
success in launching new trades.

For my own
seasonality analysis, I prefer a different approach to the classical
way seasonality is analyzed in the futures world. Very long time
horizons, often 15 to 40 years of price data, are crunched to build
a typical futures seasonality chart. This approach is sound and has
a great benefit. By considering seasonality across bulls and bears
alike, secular trends are largely filtered out. This yields the
most purely-distilled form of long-term seasonality that persists
across all market conditions.

But this classical
approach also has limitations. Prices behave very differently
during secular bulls compared to how they behave in secular bears.
Since I happen to be trading gold and gold stocks during today’s
secular bull, I am most interested in how seasonality has affected
gold in this bull only. While such a relatively myopic
perspective dilutes seasonality by crossing it with the secular
trend in force, these hybrid seasonals ought to be much more
representative of what we can expect seasonally in this bull.

Hence the title of
this essay, gold bull seasonals as opposed to the usual
ultra-long-term gold seasonals. Our current gold bull was born from
deep secular lows back in late 2000 and
early 2001.
So this hybrid take on gold seasonals includes every trading day in
gold from January 2000 to June 2007, the period of time this gold
bull has encompassed. It truly reveals the unique seasonal
tendencies of gold in this bull to date.

The calculation
methodology behind this first chart is simple in concept. For each
calendar year, the daily gold price is indexed off the first trading
day of that year which is assigned a value of 100. Then these
individual annually-indexed results for all calendar years are
averaged on a day-by-day basis. The result shows gold’s relative
performance tendencies in an average bull-market year. It is pretty
interesting.

In addition to
these gold bull seasonals drawn in blue, I also rendered one
standard deviation above and below them in yellow. Since these
standard-deviation bands largely fall outside of the bounds of the
main chart, an inset chart is included with the same vertical-axis
intervals to illustrate the full range of these bands. The distance
between these bands is important for interpreting the seasonals, as
I’ll get into a little later.

On balance, gold
has tended to rise 12% annually in this gold bull, from an indexed
level of 100 in early January to 112 in late December. These are
very impressive average gains which have already earned fortunes for
contrarian investors and speculators.

But the most
fascinating attribute of gold bull seasonals is they have formed a
beautiful uptrend channel since 2000! There are actually parallel
well-defined seasonal-support and seasonal-resistance lines which
combine to make a seasonal uptrend channel. These simple technicals
help traders understand when gold has the highest probability of
being strong during the calendar year.

When trading a
secular bull market, the greatest opportunities for profit are on
the long side. So both investors and speculators seek to buy when
prices are relatively low. The bullish tailwinds of gold
seasonality are the strongest when gold approaches its seasonal
support. Over the course of a typical calendar year, gold tends to
hit its support three times and approach it on a fourth. These are
the highest-probability-for-success times in seasonal terms to add
new long gold and gold-stock positions.

The first support
approach occurs in early January and the second in mid-March. It is
provocative that these first two low points arose on schedule in
calendar 2007. Gold hit an interim low in early January and another
in early March. These two points proved to be the best times to add
gold and gold-stock positions this year. Although it is true that
H1’07 data is already factored into these seasonals, this is
only one year out of eight so 2007’s influence on the chart line is
relatively moderate. Check out last year’s
pre-2007 chart
which showed the same tendencies.

It is actually off
of the mid-March seasonal low when gold’s first big seasonal rally
launches. It tends to run until late May before a pullback into the
summer. This year gold started its first big seasonal rally on
schedule in mid-March, but it failed early in late April due to
abnormally heavy central-bank gold sales. Still though, as we have
seen in our Zeal trades this year, it was very profitable to buy
gold and gold stocks near the March seasonal low.

After the usual
May top, gold’s seasonally weakest time of the year comes into
play. From May to late July, gold tends to grind sideways to
lower. We certainly saw gold mirror these weak seasonal tendencies
this year, as it has been fairly weak on balance since late April.
While gold usually isn’t all that exciting in the summer doldrums,
this necessary consolidation leads up to the biggest seasonal gains
of the year.

In late July, in
the next couple weeks here, gold tends to bottom and then start
powering higher as autumn gold demand builds worldwide. The second
big seasonal rally in gold occurs between late July and late
September. This is similar in magnitude to the first one in the
spring. The spring rally tends to take gold from 100 to 105
indexed, while the late summer one tends to run from 103 to 108
indexed. Both rallies are nice and often very beneficial for gold
stocks, which are primarily driven by the gold price.

With August and
September typically weighing in strong in seasonal terms, the
obvious implication here is to get long gold, silver, and
precious-metals stocks now if you are not already deployed.
If late summer buying drives gold higher as usual, the
more-speculative silver and precious-metals stocks will follow it
up. Investors and speculators alike should take advantage of the
seasonally weak summer to add positions ahead of the big seasonal
rallies expected in the second half of the year.

After a brief
seasonal pullback in early October, gold starts its third and
greatest seasonal rally. Incidentally this happened last year too,
as gold carved a major interim low in October way down near $562 an
ounce! After this low, gold exhibits great seasonal strength in
November and December. This third major rally continues into
January and early February. Since this one takes gold from 105
indexed up to effectively 115 indexed if the January/February
portion is added, this third rally is about twice as big as either
of the first two.

Thus gold’s
bull-market seasonals greatly increase the probability for success
for long positions in the second half of the year starting in late
July. From August to early February, traders have the opportunity
to ride two of the three big seasonal rallies including the biggest
by far that starts in October. While it remains to be seen if gold
will reasonably mirror its established pattern for the rest of this
year, it sure has been mirroring it fairly well since last October.
I sure wouldn’t bet against these seasonal tendencies today.

While these
seasonals are certainly exciting and encouraging since we are
heading into the best part of the year for gold, they shouldn’t be
considered apart from their yellow standard-deviation bands. The
standard deviation is a dispersion measure of how far apart the
underlying annually-indexed numbers are that are averaged on any
particular day to produce the blue seasonal line.

You can get the
same average of 50 with underlying data of 45 and 55 or 10 and 90,
but the average is certainly more representative of the first set.
Obviously the greater the dispersion in the underlying data, the
less representative is its average and the less reliable it is as an
indicator.

The yellow SD
bands in these charts, particularly in the inset charts, offer a
visual proxy of how dispersed the underlying annually-indexed gold
data is. Narrow SD bands, such as from July to October, show a
relatively tight cluster of data from individual bull-market years.
This means gold’s seasonal tendencies during these times are more
representative of the actual underlying data. Conversely the huge
SD spread in May shows that gold’s seasonal tendencies during that
month are less representative. Please keep this in mind as you
digest these charts.

Overall, I think
the SD bands for these seasonals seem reasonable. They never come
close to diverging far enough to suggest no meaningful clustering of
the underlying individual-year data. If there were extreme spikes
the seasonality’s usefulness would be suspect, but thankfully there
are not.

But one problem
with applying SD bands to indexed data is they are always closest
near where the indexing starts. Since the first trading day of
every year is indexed at 100 for gold, the average of the first day
across all years is always 100. The deeper into a year you get, the
more each individual year’s index diverges and the greater the SD
dispersion grows. To attempt to gain an alternative seasonal
perspective less affected by this tendency, I also indexed gold on a
monthly basis.

In this next
chart, the same raw feedstock data since 2000 is indexed at 100 at
the beginning of each calendar month instead of each calendar year.
Then all the individual January indexes are averaged and plotted,
then the February ones, and so on. This resulting chart shows the
calendar-month tendencies of gold within this secular bull market.
It helps illuminate gold seasonals from a different perspective than
the annually-indexed approach, highlighting both similarities and
differences.

Also, I didn’t
want the resulting data to get lost within a line since each
individual trading day is potentially important seasonally in this
approach. So in both these charts I rendered the actual datapoints
visible as dots and then connected them with thin lines. This
atypical approach enables us to quickly see whether a sharp monthly
move is merely a single connection between two widely-separated
datapoints or a more statistically-meaningful solid connection
running through multiple datapoints.

As you digest this
chart, realize that each calendar month is a discrete
individually-indexed unit. At the first trading day of every month
the indexing starts anew so there are no inter-month connections in
this perspective. January is totally independent of February and so
on down the line here.

Interestingly this
monthly seasonal approach confirms the four outstanding seasonal
long points that the annual gold seasonality revealed. Gold tends
to be weak seasonally in early January, mid-March, late July, and
mid-October. These four points, as well as a fifth in early June,
represent the times of the year when gold is most likely to be
seasonally weak and hence the highest-probability-for-success times
to add long positions.

In addition, seven
months are classifiable as seasonally strong. If gold gained more
than 1% in a given month on average, if it closed a month above 101
indexed, then it is a strong month. 1% monthly gains correspond
well with the 12% annual gains seen above in the annual seasonal
analysis. January, April, May, August, September, November, and
December all weighed in as strong by this definition.

Encouragingly, the
very best calendar months of the year seasonally are all clustered
in the second half. We are heading into this typically exciting
time of the year for gold. November was the top-ranked month
seasonally, running up to 103 indexed on average. September was not
far behind, nearly hitting 103. 3% monthly gains in gold are huge
and often translate into excellent returns in silver and PM stocks
too.

The third and
fourth highest-performing months for gold have been August and
December respectively. Both saw monthly gains just shy of 102
indexed. 2% monthly rallies are certainly nothing to scoff at
either. The really great thing to realize this time of year is that
we are now rapidly approaching these seasonally exceptional months
of August, September, November, and December. If gold holds true to
form in 2007, we should be in for a bullish and profitable second
half.

Obviously the
broad strategic message behind these gold bull seasonals is that
probabilities favor getting long in the summer to ride the major
seasonal gold rallies between August and January. Buy gold, silver,
and PM stocks in the summer doldrums when they are out of favor and
hold for the expected gains over the next six months.

But there is an
important caveat to bear in mind regarding seasonal analysis. While
seasonals do offer valuable insights into probabilities that are not
readily apparent by other means, they are a secondary indicator
at best. Sentiment is much more important than seasonal
technicals on a short-term basis and it can easily override
seasonals. So seasonals should only be used as a secondary
confirmation of primary indicators and not as a primary trading tool
by themselves.

A key example
occurred last year.
Oil’s bull-market
seasonals a year ago showed a huge seasonal tendency for oil to
soar in August and September. Many traders, including me, were
heavily deployed in oil stocks and options in advance of this
seasonal tendency. But when no hurricanes materialized in July and
August, sentiment plunged and traders sold oil aggressively.
Seasonal tendencies established over eight years failed to hold in
the second half of 2006. Bad sentiment overwhelmed the positive
seasonals and traders took big losses in oil-related positions.

Thankfully this
year the gold seasonals do line up with the already bullish
gold fundamentals
and technicals.
And sentiment in the PM realm has been pretty rotten in recent
months, typical of bottoming periods before big uplegs launch. With
the primary indicators suggesting a major gold, silver, and PM-stock
upleg is due, the secondary confirmation provided by the gold
seasonals is very welcome. It increases our odds for success in
long PM positions.

At Zeal we have
been anticipating the inevitable return of strong bull-market
conditions to the precious metals and we have been trading
accordingly. We have been aggressively buying elite gold and silver
miners and explorers on weakness and working to get fully deployed
in the PM sector. To mirror our trades and enjoy practical
cutting-edge commodities-stock-trading analysis,
please subscribe
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monthly newsletter today!

The bottom line is
gold has already established very definite seasonal tendencies in
its bull to date. Gold tends to be weakest in the early summer
leading up to the end of July. Then it tends to rally in increasing
strength through the end of the year and into January. With primary
indicators suggesting that such a rally is indeed due, the secondary
confirmation provided by the gold seasonals is very welcome.

If you are bearish
on gold today like the vast majority of traders, realize that
contrarians must trade against the crowd. The time to least doubt
any asset’s near-term prospects is when the most people doubt them
the most. Gold typically tends to get beat up in the early summer
months just like it did this year. But after the summer doldrums
its big seasonal rallies make the wait well worth it.